Economic recovery is underway and tens of thousands of small businesses are leading that recovery. Financial institutions are seeing good lending opportunities and once again the race is on to expand small business lending.

THE BAD NEWS

After calamitous events in the financial sector, regulators will be vigilant in their review of your lending systems, policies and procedures. Corporate compliance departments have moved from a seat at the back of the bus, to the driver’s seat. You are going to have to have your ducks in order before you write those lucrative small business loans

It’s time for you to ensure policies and procedures are in place to manage this new business.

THE UGLY NEWS

The accountant who wanted to be a Lion tamer in a famous Monte Python skit, changed his mind after he saw what a real Lion looked like. Lax “pussycat” regulators of 2008 have become “real Lions”.

Accountability is the new reality. Examples are everywhere. Regions Bank in Louisiana had deficiencies in its policies and procedures. This contributed to inaccurate reporting and incomplete information.

Presidential election years can have significant impact on economic expectations and behavior. Adding to the fact that the previous four years may have permanently altered the strategies of business owners, recent news in the Washington Post of tightened borrowing in commercial lending is not surprising. Given that interest rates remain historically low, however, this is certainly an unprecedented time.

As long as GDP growth in North America (and specifically the United States) remains below the 3% benchmark, this type of erratic consumer response will continue…at least through the November elections.

For banks, credit unions, and finance companies, it is vital to provide confidence to your borrowing customers, as well as your lending staff. Covarity’s software solution accomplishes this by automating the loan monitoring process, whether it be through document exception tracking, financial analysis, or portfolio management. Let Covarity ease the uncertainties of your borrower and empower your relationship managers to discover new business opportunities.

About Covarity, Inc.

Covarity is the leader in post-origination commercial loan monitoring and analysis solutions for financial institutions that offer working capital lending products. Over 20,000 working capital loans representing more than $9 billion in outstanding balances are regularly monitored and analyzed using Covarity. The only solution that combines rich financial analysis with the ability to streamline and automate the complexities of borrowing base formulas and calculations, Covarity is able to support lender’s working capital loans requiring frequent review of collateral and financials. By providing the insight and control that lenders need to profitably grow their portfolio – while reducing risk and enhancing client service – Covarity enables lenders to enjoy improved competitiveness, reduced costs and richer client experiences. Covarity’s customers include RBC Financial, CIBC, Fidelity Bank, Crestmark Bank and Libro Financial Group.

To stay informed of industry and Covarity news, Follow us on Twitter or check out our website for insightful resources and blogs.

Online educational sessions for commercial lenders

KITCHENER-WATERLOO, CANADA – March 12, 2012 - Covarity, the leading provider of post-origination commercial loan monitoring and analysis solutions for financial institutions that offer working capital lending, today announced that starting March 14th, 2012, they will host a series of complimentary educational webinars. Specifically, the online events will focus on ways that C&I lenders can increase control, reduce loan losses and grow a successful portfolio.

The webinars will include insight from esteemed speakers – industry analysts, thought leaders and commercial banking executives – who have demonstrated excellence in navigating institutions through the recent credit crisis. Drawing on best practices, each speaker will relate actual success stories and step-by-step guides to optimize the usefulness of this learning opportunity.

“Last year’s webinars were such a huge success, that we’ve continued with our theme of helping banks improve their commercial portfolio health and performance, with an added focus on issues faced by C&I lenders,” stated Rod Foster, Covarity President and CEO. “We are excited about the impressive lineup of topics and speakers that have been assembled.”

The Risk Management Association (RMA), the only association that specializes in promoting effective and prudent risk management practices for institutions of all sizes, across the entire financial services industry, has once again offered these webinars to its membership.

March Webinar:

Credit risk expert and recognized speaker, Scott Miller, Principal at Crowe Horwath, will kick-off our 2012 webinar season by sharing a landscape view of the world of C&I lending as we explore the significant changes that have occurred over the past 12 months as many institutions made the pivot to C&I to grow and offset CRE declines. Scott will join Covarity to share best practice case studies for portfolio success across a number of C&I lending dimensions.
Scheduled for March 14th, 1PM ET.

About Covarity, Inc.

Covarity is the leader in post-origination commercial loan monitoring and analysis solutions for financial institutions that offer working capital lending products. Over 20,000 working capital loans representing more than $9 billion in outstanding balances are regularly monitored and analyzed using Covarity. The only solution that combines rich financial analysis with the ability to streamline and automate the complexities of borrowing base formulas and calculations, Covarity is able to support lender’s working capital loans requiring frequent review of collateral and financials. By providing the insight and control that lenders need to profitably grow their portfolio – while reducing risk and enhancing client service – Covarity enables lenders to enjoy improved competitiveness, reduced costs and richer client experiences. Covarity’s customers include RBC Financial, Fidelity Bank, Crestmark Bank and Libro Financial Group. Please see www.covarity.com for more information.

Just over a year ago, on the back of the release of the CFA’s findings from their Q4 2010 lending index, we blogged about the opportunity confronting asset-based lenders. In 2010, when many borrowers lacked the cash flow and balance sheet requirements for a traditionally structured loan, asset-based lenders were seeing growth in new credit commitments as borrowers came to them to secure new financing.

One year later and the trend is continuing, with new credit commitments originated in the 4th Quarter of 2011 18.4% higher than were reported in the 4th Quarter of 2010. Further evidence that U.S. businesses are in need of more financing can be found in the CFA’s Lending Index (see below).

Survey of leading asset-based lenders reveals significant increase in new credit commitments to U.S. businesses.

New York, NY, March 01, 2012

The Commercial Finance Association (CFA) today released its Quarterly Asset Based Lending Index for the 4th Quarter of 2011. The index, based on data provided by the Association’s 22 largest asset-based lenders, reveals a sharp rise in new lending and healthier portfolios for lenders.

The survey results indicate that more U.S. businesses are seeking capital. CFA members surveyed reported that new credit commitments originated in the 4th Quarter of 2011 were 8.4% higher than the 3rd Quarter and 18.4% higher than were reported in the 4th Quarter of 2010.

Further evidence that U.S. businesses are in need of more financing can be seen in the 4Q ABL Index’s finding that total asset-based credit commitments rose by 3.2% in the 4th Quarter, compared to the previous quarter, with 76% of responding lenders reporting an increase in total committed credit lines.

“The considerable growth in new credit commitments in the fourth quarter is another encouraging sign that businesses are growing more confident about the economy and seeking capital to meet their needs,” said CFA Chief Operating Officer Brian Cove. “As we have maintained throughout the recession and credit crisis, and the ensuing recovery, the asset-based lenders and factors that comprise the CFA membership will continue to lead the way as a primary source of working and growth capital for U.S. businesses as the economy continues to move in a positive direction,” added Cove.

Businesses in need of financing are encouraged to utilize the CFA’s free online service, “Find a Lender,” by visiting http://www.cfa.com.

In another indication that the commercial lending environment is improving, the Index found that 43% of respondents reported a decrease in net write-offs in the 4th Quarter, compared to 28% in the 3rd Quarter. Only 9% of lenders reported an increase in net write-offs. Gross write-offs as a percentage of total outstandings also declined in the 4th Quarter, falling well below 100 basis points.

The Quarterly Asset-Based Lending Index was conducted by R.S. Carmichael & Co., an independent market research firm, to measure business growth, credit commitment, credit line utilization and portfolio performance of the 22 largest CFA members engaged in asset-based lending. The survey was commissioned by the Commercial Finance Association. For a full copy of the survey, please contact Brian Cove at (212) 792-9390 or bcove(at)cfa(dot)com.

About CFA
Founded in 1944, the Commercial Finance Association is the trade group of the asset-based financial services industry, with nearly 300 member organizations throughout the U.S., Canada and around the world. Members include the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, hedge funds, private equity firms, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.

Banks have long been built on massive amounts of data. But as “big data” gets even bigger, legacy storage systems are growing increasingly inefficient and even obsolete, according to industry experts.

In fact, financial institutions will have to completely rethink and recreate the way they store data to effectively deal with the crush of information they possess, says Barbara Murphy, CMO of Panasas, a Sunnyvale, Calif.-based data storage provider. “The challenge that the banking industry has in consolidating different data types is, can you take all the different file types and have them rest in a single location?” she notes. “You need the scalability that can handle that, which traditional systems don’t have. Infinite scale is now a requirement. There needs to be an entirely different architecture.”

Financial services firms now recognize the emergent need for quick access to centralized data, and they are not content to propagate the traditional model of storing data in multiple silos, Murphy adds. “Our customers are asking for one huge, big system where all the data they could ever want is on that system,” she says. ‘That’s a very different model [from] the traditional storage system model.”

Many lenders today may feel a little bit like Max, Mel Gibson’s iconic character in the 1980s futuristic sci-fi movie trilogy Mad Max. In the same way that the post-apocalyptic landscape faced by Max was a far different world than existed before, the post-financial crisis lending landscape is far different from what existed before 2008.

This is true for all types of lenders, including both commercial banks and asset-based lenders. Since the onset of the financial crisis more than three years ago, virtually everything about commercial lending has changed. This includes much stricter credit criteria and more risk aversion on the part of lenders, as well as enhanced regulatory scrutiny on lenders.

In particular, federal regulators now require that commercial banks’ loan portfolios be more diversified. Specifically, regulatory guidance now caps the amount of capital that can be invested in commercial real estate (CRE) and acquisition, development and construction (ADC) loans as a percentage of total capital. A natural result of this has been a renewed emphasis by banks on commercial and industrial (C&I) loans.

“C&I loans are replacing CRE and ADC loans in our portfolio – we’re slowly shrinking that bucket,” says David Wooding, a senior vice president with The Columbia Bank, a commercial bank in Columbia, MD., with $2 billion in assets. “While there is definitely pressure to grow our C&I loan base, it’s a longer sales cycle. Banks in general are scrutinizing credits more closely today in light of the underlying weaknesses in the economy.”

“Most banks are in the ‘stealing’ business right now when it comers to C&I loans,” says Jeffrey Covington, senior vice president with NewDominion Bank, a community bank in Charlotte, N.C. with $400 million in assets. “It’s no secret that CRE loans are passé and C&I is the way to go for the foreseeable future. All the banks here in Charlotte, from the big mega-banks to the small community banks, are out trying to find good manufacturing and distribution companies and business services and professional firms that need owner-occupied real estate loans, equipment loans and lines of credit.”

However, with little credit demand among these segments for new buildings and equipment or expanded credit lines, Covington says he and most other bankers are trying to woo clients from each other based almost exclusively on service and rate. “While the turmoil in the banking industry can sometimes expose holes in service, it’s much harder to gain the favor of a new client without a fresh credit need to help pry them away.”

Unforeseen Consequences

While certainly welcome given what has happened with residential and commercial real estate over the past few years, this shift in emphasis to C&I loans could lead to some unforeseen consequences.

John Barrickman has worked in commercial lending for more than 40 years, during which time he has served as a front-line commercial lender and as a bank CEO. As the president of New Horizons Financial Group, a financial services industry consulting firm headquartered in Atlanta, he has a unique perspective on today’s commercial lending landscape in light of not only the past three years’ developments, but developments over the past 30+ years.

“Most banks, and community banks in particular, traditionally focused on CRE and ADC loans,” says Barrickman. “With what has happened in real estate and the new regulatory guidelines, many are now starting to migrate back to C&I loans. What I’m seeing, however, is that many bankers’ lending skills have deteriorated and many CRE lenders are having a hard time making the transition. I’m getting lots of calls from banks saying they need to grow their C&I loans and their lenders need more training.”

“There’s no question that fewer bankers today are formally credit trained like those of us who’ve been making commercial loans for 20 to 30 years or longer are,” notes Covington. “Lots of commercial bankers can do a loan on a building, but the advantage today goes to the lender who really understands what C&I lending is all about.”

A Familiar Scenario

The scenario Barrickman often sees looks like this: A bank has a long-time customer that has survived the recession and financial crisis, but it can no longer lend to the business using traditional C&I lending techniques because the leverage is too high, liquidity is strained, etc. “From the banker’s perspective, the business is no longer creditworthy.”

In this situation, banks need to exercise more control over the collateral, but they often don’t have the staff, infrastructure or systems required. “Banks need to properly monitor and manage these types of loans, which includes having systems for understanding and controlling the collateral and monitoring the borrowing base,” Barrickman adds. “And they need lenders that can go out and look at the collateral periodically to make sure it’s actually there and is of the quality it’s supposed to be. There’s more to it than just counting boxes.”

Look familiar? Of course it does. As Barrickman notes, “This is the classic case where an asset-based lender can come in and help both the borrower and the bank. Therefore, asset-based lenders should make a concerted effort to partner with banks. The bank can maintain the primary relationship with the customer and still meet the customer’s credit needs responsibly by engaging the asset-based lender as a partner – either to issue the credit or help monitor the collateral.”

Getting Back to Lending Basics

Covington notes that many banks lost sight of how lines of credit are supposed to work and, as a result, ended up backing themselves into an asset-based lending corner. “If $900,000 is outstanding on a $1 million line of credit, you’ve essentially got an asset-based loan, with long-term repayment based on short-term assets, which is very risky. As banks realize this, some are starting to get back to the proper use of lines of credit for temporary working capital, with companies in and out of the line on a normal monthly cycle.

“If we saw that a business was going to be heavy into its line right from the start, or we expected this to happen soon, we might call in an asset-based lender to either take the whole lending relationship or help out with underwriting and monitoring,” Covington adds. “In this case, the credit position would still be ours.”

Unlike asset-based lenders, Covington says banks tend to focus less on how quickly receivables and inventory turn or whether inventory is in boxes or work in process. “At the end of the day, our underwriting is based more on company performance: Is there a strong balance sheet? Are there consistent trends in earnings and equity?

“If receivables and inventory monitoring requires more than a casual glance, that’s when I believe banks should bring in an asset-based lender that specializes in this,” he says. “Either let them take the credit, or have them confirm that the receivables and inventory are as strong as you think they are.”

Wooding believes commercial banks are well equipped to do what he calls “asset-based lite: a company that’s strong with good assets, for which you just need to put together a line of credit with a borrowing base certificate monitored monthly.” A loan like this can typically be monitored through monthly financial statements, receivable and payable aging schedules and an inventory report, Wooding notes.

“But most banks aren’t set up to do heavy-duty asset-based lending – and, in fact, most have gotten away from it,” he adds. “We have looked into it in the past, but have decided there are too many other opportunities to pursue without taking on that level of risk exposure, monitoring and expense. Instead, we refer intensive asset-based lending out to asset-based lenders, but hold onto the deposits and the rest of the banking relationship.”

Filling the Gap

According to Wooding, there’s a gap in the market right now for asset-based loans of $1 million or less. “I don’t know where a business turns that needs a less-than-$1 million ABL-monitored line of credit. Most commercial banks want to do larger deals.”

This represents a tremendous opportunity for small and mid-sized asset-based lenders, for whom this size loan is usually a home run. Such a loan can be a stepping stone to help a business through a financing transitional period until it once again qualifies for traditional bank financing.

The bottom line: There are many nuances to C&I lending that not all bankers are familiar with. Tremendous opportunity currently exists for asset-based lenders and banks to team up and, working together, deliver the kinds of financing solutions that are desperately needed by many business borrowers today.

Tracy Eden is the National Marketing Director for Commercial Finance Group (CFG), which has offices throughout the U.S. and Canada. CFG provides financing solutions to small and medium-sized businesses that may not qualify for traditional financing. Visit http://www.cfgroup.net or http://www.fvf.ca or contact Tracy at tdeden@cfgroup.net to learn more.

(The following is a guest post from Toby Dahm, Senior Vice President at Hennessey Capital. This article has been re-published here with permission – for additional articles from Hennessey Capital, please visit their Capital Conversations blog.)

Recent economic data suggests that the U.S. economy is beginning to shake off its grogginess and is poised to move forward. A key factor for small businesses to participate in the upturn is having sufficient funding to support their growth. Limited access to capital has perhaps been the greatest hurdle small businesses have faced the past four years.

It appears that finally, the credit freeze is thawing. In a January 4 article by Angus Loten of The Wall Street Journal, he reports that “small-business lending hit a four-year high in November.” What does this mean for small businesses that need to borrow to grow?

Money is out there, however, not all lending institutions are lending. Some national banks and many community banks are still licking their wounds from the recession and are not in a position to expand lending. The willingness of healthy banks to lend is largely based on their preference to balance their loan portfolio which often is heavily weighted with poor performing commercial real estate loans (CRE). This means that banks have a stronger appetite to make general business loans, known as commercial and industrial loans (C&I).

There is money for CRE loans, particularly those supported by the small business administration (SBA), but traditional CRE loan standards have tightened up significantly.

How attractive is the market for C&I loans? As Mr.Loten of The WSJ reported, this market is as good as it has been in four years. However, if you are seeking a C&I loan, you need to carefully select the lenders you apply with. If you want ongoing interaction and responsiveness to changing needs, such as a revolving line, or frequent loan requests to support growth, a community bank is probably a better fit. They tend to maintain a lower loan to staff ratio which allows them to spend more time with individual clients. If you are looking for a low cost, transactional loan such as a term loan, or a lease, a national or large regional bank will be a better fit. Be aware of centralized decision making and limited access to a relationship officer, which makes them better suited for transactional vs. relationship borrowing situations. The larger banks also tend to have a broad offering of non credit services, such as cash management, international trade, investment advisory, etc.

Specialized lending such as asset based lending (ABL) has filled much of the void left as the banks pulled back. This is due to the ABL focus on collateral and cash flow rather than on historical financial results. An asset-based line of credit is often a better fit for small businesses than traditional loans due to flexibility to support rapid growth or unique needs. ABL can also be used in conjunction with bank loans. This type of three party lending arrangement is often overlooked, but can be a great solution for a growing business.

It is encouraging to see our economy gaining traction, and recent data points to a strong start in 2012. Small businesses need appropriate funding to support this growth and I believe that there will continue to be more access to both traditional and specialized forms of lending. It is very important to understand which lending sources are the best fit for your needs and current situation. Being with the right partner will give you your best chance to realize the opportunities that our awakening economy will offer.

To stay informed of industry and Covarity news, Follow us on Twitter, Like us on Facebook or check out our website for whitepapers, reports and more insightful resources.

Asset-based loans (ABLs), which typically are secured by an asset on the company’s balance sheet, such as inventory or accounts receivable, enjoyed a record year in 2011. The value of ABLs made during the year topped $100 billion, according to data from Thomson Reuters LPC. About 375 deals were completed, or more than during any of the previous seven years. Asset-based loans accounted for 18% of the overall leveraged loan market, up from about 10% five years ago.

The bulk — in fact, more than 80% — of the loans were for refinancing. Conversely, the volume of new money deals came close to historical lows, due to drops in buyout financing for mergers and acquisitions, Thomson Reuters said.

Working capital lending is hard, we know. After years of experience working with and learning from lenders of all sizes across North America, Covarity can well and truly say, ‘we know how’ to monitor your working capital portfolio.

More and more, working capital lenders are turning to us, and we’re proud to share the proof of this …

Each month with Covarity:

Over 20,000 working capital loans worth more than $9 billion are managed

More than 88,000 financial documents are collected and analyzed

120,000 covenants, ratios and early warnings are calculated and monitored

Covarity has become the #1 choice for commercial banks that offer working capital lending and is the only solution that combines rich financial analysis with the ability to streamline and automate the complexities of borrowing base formulas and calculations.

To stay informed of Covarity news, Follow us on Twitter, Like us on Facebook or check out our website for case studies, whitepapers and more insightful resources.

(The following is a guest post from Jeffrey Sweeney, CEO and Managing Director at US Capital Partners. This article has been re-published here with permission – for additional articles from US Capital Partners, please visit their blog.)

Asset-based lending (ABL) is on the sharp rise again. In the US and Canada, syndicated asset-based loan issuance has increased by more than 24% this year, to $82 billion year-to-date, compared to the same period last year, according to Dealogic. Half of the ABL loans this year, or $41 billion, have been refinancings.

Unsurprisingly, this has triggered a lot of discussion about ABL trends. If you are a smaller business, however, be careful not to be misled by some of the conclusions.

The Reporting Gap: Small and Lower Middle Market Companies Remain Underserved and Under-Reported
The ABL news in the media tends to focus overwhelmingly on large-cap lending. You only need to look at the examples provided: Kaiser Aluminum’s recently closed $300 million revolving asset-based facility, Brazilian JBS’s $850 million asset-based loan, and Sears’s record $3.3 billion asset-based loan.

The problem is that the small-cap and large-cap ABL marketplaces are very different to each other. A lot of the analysis therefore isn’t very relevant to a smaller company looking to borrow. No one really explains or provides good statistics on small-cap ABL, although smaller businesses are in desperate need of this information.

Recent Trends in Small-Cap ABL
According to recent reports, for instance, borrowers are now finding better “covenant light” ABL terms and conditions. While this may be true for larger companies, it is not always the case for smaller businesses. In small-cap ABL, covenants have actually been getting a little more stringent, as lenders have been imposing some additional restrictions to push pricing down on the higher-quality, custom end of ABL deals.

In small-cap ABL, credit lines are also more differentiated now, with variable costs depending on the creditworthiness of the borrower and the structure of the deal. In short, there is now a much greater variety of products for borrowers, rather than simply lower pricing across the board.

Getting a Deal Done
The ABL marketplace for small businesses is highly fragmented, and there remains great variance in pricing. It can be difficult for a busy CFO or CEO who doesn’t inhabit the terrain to get the best possible financing for a small or lower middle market business. It’s therefore worth approaching a small and lower middle market specialist lender like US Capital Partners, LLC who can provide financing tailored specifically to a company’s credit profile and collateral, from ABL to cash flow, quickly and efficiently.

US Capital Partners is a private investment bank, direct lender, co-lender, and lead financial arranger specializing in asset-based debt for small- to middle-market private and public companies with $5 million to $100 million in sales. Since 1998, US Capital Partners has provided lending services and participated in funding asset-backed loans of $500 thousand to $30 million for growth capital, working capital, assets, acquisitions, and liquidity events.